Will the Fed’s rate rise hurt Telstra Corporation Ltd’s share price?

Credit: Telstra

From the depths of the GFC until February this year, the Telstra Corporation Ltd (ASX: TLS) share price rampaged higher.

Source: Google Finance

Source: Google Finance

In fact, investors who fortuitously bought Telstra shares in 2010 and held until February would’ve made around 134% in capital gains and an additional 47% in dividends, excluding the benefits of franking credits. Indeed, Telstra was a perfect addition to the portfolios of investors who were seeking an escape from record-low interest rates.

However, over the past six months, the Telstra share price has fallen 11%, and some investors may be worried that rising interest rates, such as the Federal Reserve’s decision overnight, could hurt the company’s share price.

Indeed, not only do rising interest rates make bonds a more attractive investment compared to stocks, debt becomes more expensive for leveraged blue chip companies like Telstra.

At June 30, 2015, Telstra’s balance sheet carried $15.63 billion of debt. Of that, $12.783 billion was offshore, meaning it was borrowed from foreign debt markets. However, much of the debt is hedged and fixed. Therefore, the effects of a lower Australian dollar, which makes foreign debt more expensive to carry on the balance sheet; and slowly rising US interest rates, may not become apparent for some time. Telstra has $2.79 billion of US-denominated debt.

Moreover, Telstra’s ‘interest cover’ is very robust, at 11.7x. That means, Telstra’s earnings before interest, tax, depreciation and amortisation (EBITDA) covers its annual interest expense 11.7 times over. Further, debt investors know Telstra is a strong business that can generate wide profit margins, such as an EBITDA margin of 40%, and will pay its dues in a market downturn.

Should you sell your Telstra shares?

Telstra has a lot of debt. But the impact of slowly rising US interest rates will not cripple the business. And although materially higher interest rates may dent investors’ demand for high-yielding dividend stocks; Telstra remains a rock-solid business and deserves a spot on long-term investors’ watchlists, in my opinion.

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Motley Fool writer/analyst Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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